Cash Managment Practice in
Cash Managment Practice in
IN
COMMERCIAL BANK OF ETHIOPIA
(A CASE STUDY ON ALEM BANK BRANCH)
DEPARTMENT OF ACCOUNTING
COLLEGE OF BUSINESS AND ECONOMICS
JIMMA UNIVERSITY
May 2012
JIMMA, ETHIOPIA
1
ABSTRACT
This research paper seeks to address the cash management practice of
commercial bank of Addis Ababa branch. It was address five basic
research questions designed to asses cash management performance of
the bank. For the purpose of the study both primary and secondary data
were used, but much focus on primary data in which more information
was obtained by interview and questionnaires.
After the data has been gathered, it would be analysed and presented.
The data analysis would be carried out based on tabulation and
percentage method. Care full interpretation of analyzed information
would be carried out to arrive at reasonable generalization.
I
ACKNOWLEDGEMENT
First of all I would like to extend my special thanks to my Advisor Ato
Anteneh Gorfu for this generous and unreserved assistance to carry out
the research paper. Next, I thank for Jimma University especially, the
colleges of Business and economics for designing such program through
which students development their knowledge. Finally I would like to
thank for all my friends for their supporting me all aspect of doing this
paper.
II
TABLE OF CONTENTS
Title Page
Abstract .............................................................................................. .I
Acknowledgment .................................................................................. II
Table of Content .................................................................................. III
CHAPTER ONE
1. Introduction ……………………………………………………………….…… 1
1.1 Background of the Study .......................................................... 1
1.2 Background of the Organization ................................................. 2
1.3 Statement of the Problem........................................................... 4
1.4 Objectives the Study ……............................................................ 5
1.4.1 General Objective ………………………………………………… 5
1.4.2 Specific Objectives ………………………………………………. 5
1.5 Significance of the Study ............................................................ 6
1.6 Scope of the Study ..................................................................... 6
1.7 Limitation of the Study ------------------------------------------------- 6
CHAPTER TWO
2. Literature Review ………………………………..…………………….………. 7
2.1 Cash Management ………………………………………………….……… 7
2.2 Control Over Cash ………………………………………………………… 9
2.3 Cash Planning (Budgeting )………..……………………………….……. 9
2.4 Controlling ………………………………………………………………… 10
2.4.1 Segregation of duties …………………………………………… 11
2.4.2 Accountability …………………………………………………… 12
2.5 Reason for holding cash ………………………………………………… 13
2.6 Investment of Idle cash ………………………………………………….. 14
2.7 Managing cash receipt and payment ………………………………... 14
2.7.1 Internal control over cash receipt …………………………. 15
2.7.2 Internal control Over cash payment ………………………. 15
2.8 Basic internal control principles of cash payment …………………. 16
III
CHAPTER THREE
3. Research methodology and Design …………………………………………..17
3.1 Area of the Study……………………..……………………………………… 17
3.2 The Research design … .…………………………………………………….17
3.3 Data type and source……… ………………………………………………..17
3.4 Method of Data collection…………………………………………………..17
3.5 Sample Size and Sampling Technique….…………………….…………..17
3.6 Data Analysis and Presentation ……………………………………………19
CHAPTER FOUR
4. Data analysis, interpretation and presentation ………………………………19
IV
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CHAPTER ONE
1. Introduction
1.1. Background of the Study
Cash is a medium of exchange that the bank will accept for deposit and
immediate credit to depositor account that include currency and coins,
personal checks, bank drafts, money order credit cards, select drafts and
so on (Planket, 1986).
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financial resource arise from the fact that the amount of productive
investment is very low. In order to receive financial constraints on
investment financial intermediaries are expected to play a deceive role is
brining about efficient way of rising the required level of funds through
application of proper financial management system. There for
financial managers how cash the bank should carry, the specific types of
securities to issue and how mach of the firms earning to Retain versus to
pay dividends, (www.com bank eth.com)
The Sate Bank of Ethiopia was established in 1942 with on objectives the
duties of both commercial and central bank is 1963 established as share
company to take over the commercial banking activities of the state bank
of Ethiopia. In the 1974 revolution, commercial Bank of Ethiopia got its
strength by emerging with privately own Addis Ababa Bank. Since then if
has been playing significant role in the development end over the
country.
On April 30, year 2011 the number of branches reached 364 stretches a
cross the length breadth of the country. CBE combines a wide capital
base with more than 9700 talented and committed employees. In 2011
whom it regard as its key asset for employees. In 2011 whom it regard as
its key asses for banking development. The state owned commercial bank
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of Ethiopia still dominates the market interms of asset capital and
customer base and Branch Network, deposit the growing competition
from Private Bank over the last 15 years.
This makes it one of the most reliable and strong commercial Bank in the
country and the region. Its strong capital base above 67 years of rich
experience in the market and large branch network through the country
enable the bank to accommodate large demand for banking service, Bank
from private and public companies and to increase its over all revenue
on sustainable base the fundamental component of our mission
statement includes customers. These are the most important asset we
continuously revise our attitude to wards the customers with the view to
securing.
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1.3 Statement of the Problem
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Eventhough, cash management receive a priority for financial institution
especialy Commercial Banks little is know on how effectively monitor its
cash flow, how to accelerate collection receipt and optimize timing of
disbursement, maximizing interest lelate collection receipt and optimize
timing of disbursement, maximizing interest earning and properly
secured investment.
There for this study tried to investigate a solution for the following basic
research questions.
The general objective of the study focus on the cash management practices of
CBE in Adiss Ababa.
In addition the above mentioned general objective the study has the
following specific objectives.
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1.5 Significance of the Study
This study will benefit CBE of Addis Ababa Branch by identifying factors
that affect the internal control over cash and suggesting possible
recommendation. It also reflects the researcher cash management
practice of Addis Ababa Branch with its limitation and weakness and
give possible commentive idea or solution as to how the financial
manager of the banks of Addis Ababa Branch should control its cash
under the proper management of cash.
Here the researcher knows that the study includes the whole banks cash
management practice but time and financial constraints the researcher
forced to focus on the assessment of cash management practices of CBE
Addis Ababa branch. After this study the community would expected to
compare the cash management practice of CBE with theoretical aspect of
cash management and it there is cash management problem give
possible solution (Advices).
During the collection of data for this study purpose the researcher would
faced different limitation, like voluntariness of the concerned people to
give the information and there was also a time constraint to do this
study.
CHAPTER TWO
2. Literature Review
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Definition of cash:- cash is a medium of exchange that a bank will
accept that a bank will accept for deposit and immediate credit to the
depositor account. Cash is any medium of exchange that a bank will
accept of face value which include bank deposits, currency, coins, bank
draft and money order.
and disbursement, the firm should develop appropriate stategies for cash
management. Some of the cash management strategies are the
following:-
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Cash planning:- Cash inflow and out flow should be planning to protect
cash surplus or deficit for each period of the planning period. Cash
beget should be prepared for this purpose.
Management the cash flow:- the flow cash should be properly managed
the cash out flow should be decelerated and in flow relatively increase.
Optimum cash level: - The firm should be decide about the appropriate
level of cash balances. The excess cash and cash deficit should be
matched to determine the optimum level of cash balances.
Cash is the most liquid asset and the standard medium of exchange and
the basic for measuring and accounting for all other items. Cash is
important current asset for operation of a business. It is the basic
impute needed to keep the business running on continuous basic. It
also the ultimate out put expected to be realized after a services is
delivered. To be reportable as such it must be readily available for the
payments of current obligation and it must be free form any contractual
restrictions that limits its use in satisfying debts. In accounting cash
consists of coin, currency and available found on deposit and the bank
negotiable instruments such as money order, certified cheque personal
and bank draft are also viewed as cash. Saving account usually
classified as cash although the bank has the lead light notice is rarely
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demanded by banks saving account are considered as cash
(keiso.etal,2001)
Due to its easily transferability, cash is the asset most likely to be used
by employees and manages. Cash is also vulnerable to theft since many
transactions either directly or indirectly affects the receipt or payment of
cash. The objective of internal control over cash are to be provide
accurate information about cash. To avoid cash shortage and excess
(idles) cash and protect cash from theft and mis use. To control cash
receipt the firm, should record the cash receipt properly and immediately
deposit the cash receipt amount.
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firm for the coming period. Cash budget consider as a standard at the
end of the period and serve as a control devices to help management
measure the firm performance may be improved. Cash budget helps to
identify periods of cash surpluses. It also help the financial manager to
measure the amount and duration of cash shortage and to prepare
repayments schedule and it there is. Cash budget helps to prepare
prepayments schedule and it there is cash shortage to finance with
borrowed funds ( college Accounting, P.230)
Cash budget estimates the occurrence, amount and duration of cost and
payment schedule for any needed financing.
following cash control method can be used as cash control principle and
standards.
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2.4.1 Segregation of Duties
Represent for each work different employees in order to create for each
employees responsibilities and assures that one person is not made bias.
For this purpose the following function should be segregated in order to
maintain a proper segregation of duties.
AUTHORIZATION FUNCTION
RECONCILIATION Function
2.4.2 Accountability
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Proper accountability is present when an asset (cash) and all cash
handling activities and accounted for properly documented and traceable
to specific cash handle. The following functions should be performed in
order to maintain a proper accountability structure.
Individual Accountability
Cash accountability
Process accountability
Security monitory
Means that the safety of and transport of assets are taken in it’s
consideration and follow up proper protocols and procedures. It’s present
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when tow people are involved in handling cash, asses one properly and
transported.
Transaction recording
clearing house for nations checks payment system, each banks must
hold sufficient balance at financial institutions so that check written by
its depositors will clear when presented for payments. Finally. Banks use
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cash balances as to purchase service from correspondent bank (timothy
etal. 1995)
Investing idle cash has tow primary function. First it is a major source of
getting earning and the other function Is to provide for the banks
liquidity need that is expected or unexpected a cash needs. Investment of
temporarily idle cash in selected type of marketable securities is a key
element of good financial management. The following are example dhort
term money market instrument like treasury bills commercial paper,
certificate of deposit bank deposit (rose Stephen, 1995)
Cash receipt and payment management if to assure that all cash receipt
and payment of the company properly managed for the purpose of the
company.
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To assure that all cash receipt by a business organization should be
recorded with out any misappropriation. The system control over cash
receipt takes place in tow ways. The firs one is cash control over the
counter and cash control by mails from charges.
Internal control of cash receipt over the counter Cash register should be
used to cash receipt and the amount written an the cash resister should
be visible to customers. There should be pre numbered receipt used in
sales process. The cash receipt should be deposited immediately.
A person independent of the cashier should count cash and compare it
to the amount recorded on the receipt. Internal control of cash receipt
by mail .The mails should be locked and the key should be placed on the
hand of responsible person. At least tow people should have to present when
mail is opened and list of money received should kept.
A prelisting of cash received should made in three copies, one copy for
cashier, the second for account department the third copy kept by preparer.
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All payment should be made by check, the check should be authorized
and approved by independent individual preparation before payments are
essential.
CHAPTER THREE
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3. Research Methodology and Design
3.1 Area of the Study
The study conducted on the cash management practice of commercial bank of
Ethiopia Addis Ababa branch,
For this study descriptive design type of research, was going to be used.
Because, the aim of the study was to describe the actual cash management
practice of Addis Ababa branch.
For this study, the researcher was used both quantitative and qualitative data
type especially the later one. The researcher also use both primary and
secondary source of data.
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After necessary data were collected from the primary source and secondary
sources the data would processing and analyze data processing is an activity
which involves interpretation data to make the data appropriate for analysis.
Data analysis would be done both by using qualitative and quantitative data
processing from the data get the data presenting would be descriptive data
presentation by using tables and others.
CHAPTER FOUR
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4. DAT ANALYSIS, INTERPRETATION AND PRESENTATION
From the above table the researcher understand that in commercial bank
of Addis Ababa branch there is educated employees. Therefore the bank
can serve its customer on time because of educated employees give their
service to the customers when they need. This implies that the
customers are initiated to deposit their cash in this branch. As a result
the bank get efficient amount of cash to serve its customer.
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Table 4.2 Respondents department in the bank
In the table above 50% of the respondents are from cashier, 33.3% of
the respondents are from the accountant, 16.7% from the manager.
From the percentage shared by looking the number of respondents the
researcher decided that, there is segregation of duties in the commercial
bank of Ethiopia Addis Ababa branch by segregating duties, that is, by
avoiding putting of employees in position of excessive trust and
responsibility. Avoiding giving of one person control over all stage of
process the bank manage cash effectively.
working
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1 1 -2 year 1 16.7%
2 2 -6 year 2 33.3%
3 Above 6 year 3 50 %
4 Total 6 100%
Source:- Researchers own computation of primary data
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commercial bank of Ethiopia generally and Addis Ababa branch
particularly set primary goal. These include to provide the cash need to
meet the firm’s payment and to minimize the amount of idle cash held by
the bank.
Source:- Questionnaire
According to the response of the respondents all of them said the bank
perform theoretical forms in to actual management.
In this case the advantage of this to know the bank have effective cash
management procedure and maintaining sufficient cash amount in
operational activities.
Businesses can not service with out cash to pay bills and to finance
growth. On the other hand having too much cash is insufficient because
cash earns considerably less than firms cost of capital.
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Yes 4 66.7%
No 2 33.3%
Total 6 100%
Source Questionnaire
From the above table 4(66.7%) of respondents said that yes and
2( 33.3%) said no . this shows the bank has excess amount of cash on
hand that is not needed for immediate purpose rather it needed in the
future period Hene, the researcher understand that the bank has a
problem of cash management.
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Source Questionnaire
The table 4.6 clearly shows that 66.6% of respondents select profitability
as the criteria that the bank consider to invest its idle cash and 16.7% of
each respondents select liquidity as criteria. From these the researcher
understand that, profitability play a major role in the investment of idle
cash because it measure the income level or the operating success of the
bank for company ability to develop. And also, liqulduty is the next
criteria of the bank in order to invest idle cash because it is frequently
used as the ultimate test of managements operating effectiveness.
Source Questionnaire
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From table 4.7 the researcher clearly know that 83.3% of respondents
that the rate of the bank cash position was mostly excessive and 16.7%
says that the rate of cash position was optimum. From this the
researcher conclude that there is mostly excessive cash position in
commercial bank of Ethiopia in Addis Abab branch. This indicates that
there is idle cash that not used for immediate purpose.
Just as cash the beginning of operating cycle. It is often starting point for
company’s system of internal control. Cash is the mere assets that are
ready convertible in to any other type of asset.
In order to protect cash from the theft on misuse a business control cash
receipts similar to different types of business. As the manager said Addis
ababa bank control cash receipts in different procedures, the bank
prepare record of all cash receipts as soon as cash is received, because
most theft of cash occurs before record is made. The bank designated
cashier are authorized to handle cash receipts different individual receive
cash record cash, receipts and deposit and hold the cash.
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4.3.2 Control over cash payments
Cash is paid fore several reasons, such as to pay expense and liabilities
or the purchase asset. The paying teller is only responsibility for making
payment and required to check that the signature and the cheque are
verified. That the amount bear signature verified machine operator and
internal auditors report when every a paying teller requests for additional
cash. The morning cash cheques and vouchers are journalized and be
compared with the total submitted by paying teller cash on hand at the
end of the payment from the blotter must agree with the total amount of
cash with drawn from the chief casher.
The chief cushier checks the correctness and balancing of the cash by
verifying the cash pocket and counting the lose notes.
Source Questionnaire
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From these the researcher understand that the bank have its cash
management system and apply giving quality service to practical.
Source Questionnaire
As can see From the above table all respondents gave their idea on
preparation of cash budget. Hence the researcher conclude that the
commercial bank of Addis Ababa branch appropriately prepared cash
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budget. Commercial bank of Addis Ababa branch used cash budget as
one of the financial principal method of forecasting the finance needs of
venture and forecasts the combined effects of planned operation on the
companies cash flow. The cash budget thus Indicates the amount of
funds. That will be needed or available for operation of bank.
Table 4.10
From the above table the respondents response shown that 66.6% are
customer’s deposit, 16.7% is capital reserve and 16.7% is other.
The researcher conclude that the bank have many customers that use
deposit service. This indicates there is high cash flow. As a result the
bank gain amount of profit by lending the money to other customers or
by investing in government treasury bills.
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CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1 CONCLUSION
The main objective of the study is to asses the cash management practice
in commercial bank of Addis Ababa branch. Based on the analysis and
findings of the previous chapter the following has been concluded.
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Investment of idle cash which is one base principle of cash
management, commercial bank of Addis Ababa branch have better
investment trend of idle cash in short term market investment by
considering its liquidity and profitability.
The bank used cash budget as one of the financial principal method of
forecasting the finance needs of venture and forecasts the combined
effects of planned operation on the companies cash flow.
5.2 RECOMMENDATION
From the discussion held in chapter four the researcher suggests the
following points for better achievement of its objective of cash management
practice.
The bank should give necessary training for their employee for
further success of the bank and to save time and cost.
The bank should manage it cash more than the current method
for the success of bank and satisfaction of customers.
When the progress of the time, organizations update their
previous cash management system, so commercial bank of
Addis Ababa branch use effective and efficient updated
technology for the improvement of its cash management is
Advisable by the researcher.
Eventhough source of short finance for the bank relatively
sufficient for its normal operation try to find other sources of
financing its short term finance rather restricted on the existing
source finance.
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The management of cash receipt and disbursement of the bank trend
and appreciable way which is acceptable in the universal policies, the
bank shall continue by this trend in the future operation period.
The bank should use the excess cash for investment purpose in order
to generate target profit (interest) rather than putting the money on
hand incurred cost for excess cash.
Finally, the researcher suggest that because of cash is liquid and it is
important to manage it. There fore the collection disbursement, and
failure to collect note receivable should be given special attention for
cash management because cash is the blood of an organization, it is
unthinkable to operate any activity with out cash.
REFERENCES
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Appendix
Jimma University
College of Business & Economics
Dear respondent
The purpose of this questionnaire was to collect data for requirement for partial
response for the following question is extremely important for the successful
completion of this paper the information provide used for purpose indicated
and will be kept highly confident I would like to thank you in advance for your
Education Status
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Service 1-2 2-6 above 6 years
Part 2 questions
1. What are the source of short term finance for the bank
Capital reserve
3 does the bank posses idle cash? If yes where dose the bank invest idle
cash------------------------------------------------------------------------------------
Maturity profitability
Liquidity other
Yes no
Quarterly annually
Practice? Yes No
8 In the operation of the bank How do you rate the cash position?
Yes No
10. Did the bank manage its cash a payment and cash receipt properly?
Yes No
Casher manager
13. What method does the bank use to control cash receipted disbursement
34